Coverage: Suit over government bailout of AIG

In a weird twist, former AIG head Maurice Greenberg is suing the government over its 2008 bailout of AIG. The trial is set to start Monday and should be interesting in what it reveals.

Leslie Scism had these details in a story for The Wall Street Journal:

Maurice R. “Hank” Greenberg built American International Group Inc. into a global financial-services powerhouse during nearly 40 years at its helm. But as the firm in 2008 neared collapse, three years after his departure, he couldn’t get calls, emails or faxes returned as he tried to offer his help, people familiar with the matter said.

Now, the 89-year-old Mr. Greenberg is getting his chance at revenge—and, as he sees it, justice—by challenging the government’s historic bailout of AIG.

Mr. Greenberg’s lawyer, David Boies, is expected starting Monday to ask a federal judge in Washington to rule that the government coerced AIG’s board into harsh terms, allegedly cheating shareholders including Mr. Greenberg in the process.

At the time of the rescue, Starr International Co., an investment and charitable firm long headed by the businessman, was AIG’s largest single shareholder, with roughly an 11% stake. Mr. Greenberg has been adamant over the years that the government ran roughshod over him and others by taking their property without the just compensation he maintains they were owed under the Constitution.

At the center of the dispute is a 79.9% equity stake that the government acquired in September 2008, in exchange for an emergency loan of $85 billion. The since-repaid assistance ultimately expanded to $184.6 billion, and the government stake peaked at 92%.

The USA Today story by Kevin McCoy added that investors are contending they weren’t adequately compensated for their stakes in the insurer:

Other major firms rocked by the financial crisis got billions of dollars in government loans or guarantees and remained independent. But the terms of AIG’s bailout deal forced Starr — the company’s largest investor at the time — and other shareholders to cede control without adequate compensation, the lawsuit charged.

Federal officials then used AIG “as a vehicle to covertly funnel billions of dollars” to the firm’s financial trading partners “in a now well-documented ‘backdoor bailout’ of these financial institutions,” Starr alleges in an 83-page amended complaint filed by renowned attorney David Boies.

“This is the only time in history when the government has taken without just compensation and/or illegally exacted the assets and equity of a company and its shareholders in connection with a loan, let alone a fully-secured loan bearing an extortionate interest rate,” the complaint charges.

The lawsuit seeks more than $40 million on behalf of Starr and other AIG shareholders.

The case also marks Greenberg’s continuing connections with AIG, the company he built into a financial services titan during a decades-long career before resigning in 2005 as investigations of the firm’s accounting arose. In May, Greenberg lost a bid to dismiss the separate civil case in which the New York Attorney General’s office accused him of accounting fraud at AIG.

Henny Sender and Gina Chon wrote for the Financial Times that this isn’t the only bailout case to make it to court:

He is not alone. Six years after the worst of the global financial meltdown, aggrieved parties ranging from Mr Greenberg to Standard & Poor’s and a group of hedge funds who hold equity in Fannie Mae and Freddie Mac, are engaged in court cases that, in come cases, seek to rewrite the history of the crisis.

“They are re-litigating the whole bailout,” said one former Treasury official who has been repeatedly deposed in several of the cases, including Mr Greenberg’s.

The list of those being deposed in Mr Greenberg’s case alone includes: Hank Paulson, former Treasury secretary; Tim Geithner, his successor; Ben Bernanke, the former Federal Reserve chairman; and Don Kohn, the former Fed vice-chairman.

Top executives of Wall Street firms and advisers, including Blackstone’s John Studzinski and Rodgin Cohen of Sullivan & Cromwell, have also been required to give testimony.

Gretchen Morgenson wrote in her column for The New York Times that much of the deal has been kept secret and exposing the details is good for the system:

Shedding sunlight on this transaction will be a good thing; from the moment the New York Fed orchestrated the A.I.G. deal, the government has worked hard to keep its full picture from coming into view.

In 2008, for example, the Fed refused to let A.I.G. identify the trading partners that received full payment on their mortgage bets insured by A.I.G. After an outcry over the secrecy, the company identified the bailout recipients in March 2009; they included Société Générale, Goldman Sachs, Deutsche Bank and Merrill Lynch.

Some segments of the depositions in the Starr case certainly support the notion that the A.I.G. deal was punitive. In one interview, Thomas C. Baxter Jr., general counsel at the New York Fed, said the interest rate extracted from A.I.G. was “loan sharky.” In another, Mr. Paulson acknowledged that the federal aid given to Citigroup posed greater risks to taxpayers than the A.I.G. loan. Yet, he said, Citigroup received far more favorable terms from the government.

It is striking to compare the A.I.G. transaction with the federal assistance provided to the banks. Too striking, perhaps — the government asked to exclude from the trial “testimony and documents offered to show that other financial institutions received government assistance on terms different from A.I.G.” Judge Wheeler indicated that he was not granting that request.

And Morgenson makes a good point that if the deal was done to protect trading partners instead of investors then those with stakes in the company should know the terms. It’s yet another example of the aftermath of the crisis and how quickly made decisions are being called into question years after they were made.